Based on this information, the controller calculates the accounts payable turnover as: Purchases for the last 12 months were $7,500,000. In the beginning of this period, the beginning accounts payable balance was $800,000, and the ending balance was $884,000. The controller of ABC Company wants to determine the company's accounts payable turnover for the past year. The Interpretation of Financial StatementsĮxample of the Accounts Payable Turnover Ratio The cash payment exclusion may be necessary if a company has been so late in paying suppliers that they now require cash in advance payments. However, the amount of up-front cash payments to suppliers is normally so small that this modification is not necessary. The formula can be modified to exclude cash payments to suppliers, since the numerator should include only purchases on credit from suppliers. Total supplier purchases ÷ ((Beginning accounts payable + Ending accounts payable) / 2) To calculate the accounts payable turnover ratio, summarize all purchases from suppliers during the measurement period and divide by the average amount of accounts payable during that period. How to Calculate the Accounts Payable Turnover Ratio If a company is paying its suppliers very quickly, it may mean that the suppliers are demanding fast payment terms, or that the company is taking advantage of early payment discounts. A change in the turnover ratio can also indicate altered payment terms with suppliers, though this rarely has more than a slight impact on the ratio. If the turnover ratio declines from one period to the next, this indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition. What is the Accounts Payable Turnover Ratio?Īccounts payable turnover is a ratio that measures the speed with which a company pays its suppliers.
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